Banks that make the most money, and the least, on credit card loans

The most lucrative card companies are ones you probably never heard of -- but whose cards you just might carry.

Store-card issuers Comenity Bank
and Synchrony Financial, formerly called GE Capital, reaped the
most interest and fees from their cardholders among 12 major card issuers, an analysis by CreditCards.com found.

Banks that issue credit cards are enjoying high profits these days, buoyed by
low defaults and cheap funding costs. But some card banks are better off than others, thanks to
cardholders who shell out more interest and fees. Creditcards.com analyzed financial
reports filed by 1,300 U.S. banks to see who made the most -- and the least -- from
their card business in 2013. (See "Credit card income at 500 U.S. banks.")

The analysis found a wide spread in card income -- with some big banks collecting three times as much from cardholders as their competitors. The
industry generated an average yield of 12.4 cents on each dollar of card balances last year, before losses and other costs. Among the top dozen issuers,
yields ranged from a high of 28.4 cents to a low of 8.4 cents per dollar of card loans.

How can some card companies charge much, much more than others?

"No. 1, consumers are not doing a lot of shopping around," said Jeanne Hogarth, vice president of policy at the Center for Financial Services Innovation. "And No. 2, it amazes me how insensitive consumers are to [the] price" of credit.

Even people with good credit are lured into high-rate cards, when they could qualify for a cheaper deal, the analysis found. On the other hand, companies making the least from cardholders kept a lid on rates and fees that other banks use to drive profits.

Many applicants, drawn in by a card's instant discounts or rewards, overlook its interest rates, penalty fees and other important costs -- to their own detriment. "When you're looking to get a credit card, we want you
to shop based on the lowest cost of borrowing," said Todd Mark, vice president
of education at Consumer Credit Counseling Service of Greater Dallas.

What yields measure
Credit
cards are known as one of banking's profit centers. A group of 16 banks that specialize in credit
cards had triple the industry's average return on assets in the third
quarter of 2014, according to the Federal Deposit Insurance Corp.'s Quarterly Banking Profile.

The yields calculated by CreditCards.com are not a look at bottom-line profits. They exclude the costs of running a card business, such as marketing, customer service, fraud
prevention and the cost of funds. The yields also leave out some income sources, such as the swipe fees that
retailers pay. However,
the yield is a good yardstick for comparing how much money each company charges its cardholders, per dollar in balances.

The chart lists 12 banks with the biggest U.S. card business in 2013. The first bar represents their average yield -- cents of interest and fees they collect per dollar of balances. The second bar shows the yield after deducting money lost when cardholders default.

After Comenity and GE, the issuers with the next-highest
yields are Capital One and Citibank -- both of which have large
store-card businesses in addition to their general purpose cards.
APRs on store-card agreements are typically several points higher
than rates on general-purpose cards. Wells Fargo, Discover, Chase and
Bank of America were in the middle of the pack of the 12 card banks, with interest
and fee income that hovered near the industry average.

Most expensive card companies
Comenity, a unit of Plano, Texas-based Alliance Data Systems,
is the bank behind more than 120 store-branded cards from niche retailers such
as Abercrombie, Dress Barn and ZGallerie. Although its name may not ring a
bell, the bank has a long reach -- with 33 million active accounts, it
estimates that one in 10 employed U.S. adults carries at least one of its
cards.

The store cards have filled in where other banks have
pulled back.

-- Dan Werner
Analyst, Morningstar

Synchrony backs cards from several major retailers including
WalMart, Lowes and Amazon. It is the biggest issuer of store cards by purchase
volume and total balances. Cardholders swiped its store cards to make $76
billion in purchases in 2013, while its CareCredit card for medical expenses
charged $6.8 billion.

Something the two store-card issuers have in common is
the high yield they generate from their card businesses. Comenity collected 28 cents in
fees and interest for each dollar it loaned cardholders in 2013, according to
its reports to bank regulators. That's more than double the industry average of
12.2 cents in 2013. GE Capital collected nearly 18 cents per dollar loaned.

What's driving the high yields? The first page of their
card agreements reveals a strong clue: Their cards typically carry annual
percentage rates of 24 percent, a level what would be penalty APR territory on general-purpose
cards.

Synchrony extends a welcome to subprime borrowers, who get a
cold shoulder at many other card issuers. More than one in four of its
cardholders has a FICO credit score of 660 or below, the company's annual
report said. Subprime cardholders have fewer choices, so they are more willing to use a higher-rate card, analysts say.

"The store cards have filled in where other banks have
pulled back," said Dan Werner, a former bank examiner who now studies Synchrony as an analyst for Morningstar. After suffering high default losses during the recession,
general-purpose card issuers are wary of less-than-prime borrowers. "Nonprime
customers who needed credit, I think they turned toward the store cards to fill
the gap," he said.

After subtracting losses from defaults, Synchrony's yield is about 13 cents per dollar of loans. That's 50 percent more than the average after-loss rate of 8.5 cents. Subprime lenders can generate high profits despite losses, industry experts said. By keeping credit limits low, subprime lenders minimize risk, while their rates make sure that losses are covered, said Marla Blow, the CEO of FS Card, a subprime card that is scheduled to launch in 2015.

"During the financial crisis, I think a lot of subprime products were more resilient" than mainstream lenders, she said. "Losses might go up by 50 percent, which is pretty severe, but you've priced it for the risk, and you've managed your exposure to the risk."

Not all store card banks cater to subprime borrowers,
and this is where Comenity and Synchrony part ways.

Not paying attention
to high rates
Why would well-off shoppers sign up for a 24 percent interest rate if they don't have to?

"You may not be paying attention to the fine print"
when applying for a store card, said Marks at the credit counseling service. Shoppers
often snatch up merchant-branded cards to win discounts or frequent-shopper benefits,
he said, hardly glancing at the rates and fees.

Private label credit card customers are interested in
the loyalty and rewards that the private label credit card programs offer and
don't consider the programs a financing tool.

-- Annabelle Baxter
Alliance Data

The typical debtor who comes to the Dallas-area counseling agency
has eight credit cards, Marks said, some of them store- or merchant-branded
cards. As a result, many of these financially strapped consumers are paying
higher rates than necessary. "People may come to us with what seems like a
punitive rate compared to their credit score," he said.

Retailers' special discounts and rewards programs for
cardholders may take some of the sting out of store card APRs. Then again, the
discounts are usually a way to encourage spending, so the savings might be
illusory. The card bank usually shares a portion of its profits with the retailer, supporting the perks that the retailer hands out to customers. Synchrony paid retailers $2.4 billion through revenue share arrangements in 2013, Werner said.

Cardholders may not even think of store cards as credit
cards, issuers say.

"Private label credit card customers are interested in
the loyalty and rewards that the private label credit card programs offer and
don't consider the programs a financing tool," Alliance Data spokeswoman
Annabelle Baxter said in an email response to questions.

But cardholders paid Alliance Data's Comenity Bank unit nearly $2 billion in
interest and fees in 2013, according to its financial reports, so many of them used their cards to finance
purchases. The company generated more interest
dollars on its card loans than some large issuers of general-purpose cards,
including U.S. Bank and Barclaycard US.

"There is a segment of the market that is young and inexperienced," Hogarth said. "They really don't know what a good interest rate is."

Traits of inexpensive
cards
At the other end of the spectrum, some of the largest card issuers
collect much lower yields on their card business, meaning lower interest and
fees for cardholders. Of the 12 largest issuers, USAA, a lender to military
families, had the lowest yield, at 8.4 cents per dollar of card loans in 2013.

What sets USAA apart? One big difference: The company doesn't
charge a penalty rate on its cards. Customers who get behind on payments will
continue to owe the same APR they signed up for. A penalty rate survey by CreditCards.com found that more companies are offering penalty-free cards. USAA does so across its card lineup, holding down its overall yield from cardholders.

"We do try to fulfill our mission of securing the
finances of military families by offering very competitive products," said
Jennifer Adams, assistant vice president of credit card product management. Applicants
for USAA cards must be part of a military family to qualify for an account.

Another distinguishing mark is that USAA prices its rewards
and nonrewards cards separately. The bottom rate for a nonrewards card starts
at 6.9 percent versus 9.9 percent for a rewards card. Pricing nonrewards lower
allows consumers who carry a balance to opt for lower financing costs
instead of a program that will reward them for spending. Fees are low as well. The cash advance fee is 3 percent, and
a $200 cap on advances keeps a lid on cardholder costs.

American Express also collects low yields, at 9 percent of
card loans, but its cards work differently than those of other big issuers,
making comparison difficult. Many of its accounts are charge cards that are
paid off monthly, so balances and interest are relatively low. Its generally affluent
cardholders charge big-dollar transactions, generating swipe fees that
merchants pay. This revenue, and the hefty annual fees that come with some AmEx
cards, support company profits, but they don't hike the yield
on card loans.

Subprime business
nets big bucks
American Express is linked with affluence, but credit cards don't
need well-heeled customers to make a good buck, their financial reports show.

In fact, the opposite is often true: Card issuers that cater
to hard-pressed borrowers often collect more interest and fees than
conservative lenders, financial reports show. Even after subtracting bad loans, many
subprime lenders still come out ahead of conservative rivals.

Put another way, financially strapped consumers -- or at
least those who had trouble paying their bills in the past -- are generating more money for banks, per $1 of card balances, than consumers who are
flush.

"I would expect to see a pretty robust profile (for
subprime lenders,) especially when losses are low, as they have been
recently," said Blow, the FS Card CEO, whose resume includes stops at the U.S. Consumer Financial
Protection Bureau and the credit risk management division of Capital One.

In the chart, the first bar shows the bank's yield on card loans after losses due to default. The second bar is the portion of loans to subprime borrowers. Banks that don't say how much of their lending is subprime are excluded.

About one-third of Capital One's card loans are subprime, the highest rate of the large banks, according to financial reports. After losses, its
yield on the card business is still over 10 percent, better than most of its more conservative
rivals. The No. 2 subprime lender of the group, GE Capital, now called Synchrony,
made the highest yield on its card business.

GE Capital didn't profit only when times were good. Even during the depths of
the recession, when laid-off cardholders stopped making payments in droves, the
company was able to remain profitable, according to its reports to the U.S. Securities Exchange Commission. GE Capital Financial's income in 2009 was only about a fifth of last year's profit, but it was still in the black.

When someone gets a solicitation they're very likely
to say, 'Oh, I must qualify for this, or they wouldn't have sent it to me.' So
then they don't bother to shop around.

-- Jeanne Hogarth
Center for Financial Services Innovation

"I was a bank examiner and I was told then, 'It's really
hard to lose money on credit cards when you charge rates like that,'" said
Werner, the Morningstar analyst. "And it's
really true."

Subprime borrowers have few options, experts say, giving subprime lenders more power to set rates higher.

"When someone gets a solicitation they're very likely
to say, 'Oh, I must qualify for this, or they wouldn't have sent it to me,'" said Hogarth at the Center for Financial Services Innovation. "So
then they don't bother to shop around."

Nationwide, about 35 percent of people with a credit score
are below 660, putting them in subprime territory, according to an analysis by the Consumer Financial Protection
Bureau. Some lenders set the bar higher, at 680.

Looking at all 1,300 banks with credit card interest in
2013, some of the most lucrative ones are subprime lenders. Merrick Bank, a Utah institution that specializes in customers with blemished credit, collected
26 cents per $1 of card loans, its financial reports said. After defaults, its
yield was 18 cents. Webbank, which backs credit repair
programs from retailers Fingerhut and Gettington, made nearly 50 cents per dollar
of card loans in 2013, its financial reports say. Its yield after defaults wasn't
reported, and representatives of the Utah-based bank didn't respond to questions.

Card profits keep growing
The Federal Reserve is set to begin raising interest rates again in 2015, and the variable rates that most cardholders pay on their balances will start going up as well. Credit cards will continue to generate high profits for banks as the
economy continues to improve, analysts expect. "The card business is back," industry analyst
Robert Hammer said in a September news release.

And even if the economy turns down again and jobs disappear,
cards see a silver lining. Some consumers who signed up for high-rate cards
because they never expected to carry a balance will find themselves leaning on
the credit to pay for weekly necessities.

Marks of the Dallas credit counseling service said he always
pulls out his REDcard at the register when he shops at Target, because it gives
him 5 percent off his total. "I don't even know the interest rate,"
he said, "because I pay off my bill each month."

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